Politics

Howard Stern’s Audience: One Group or Two?

Howard Stern is a wealthy man, but he sought to be some $300 million richer after his radio employer, Sirius, doubled his audience by acquiring rival XM. Stern thought his contract said as much but a court disagreed. Businesspeople and lawyers alike can take a lesson from the deal, presented here in one of my three-part series this week on the unruliness of words–and numbers. Following on my accounts of whether the attack 14 years ago today on the WTC was one occurrence or two and whether The Hobbit film trilogy released by New Line Cinema was one film or three, here’s the Stern story.

The Howard Stern Show is a popular off-color program long aired on traditional radio. But in 2004, one of the leading satellite radio companies, Sirius Satellite Radio Inc., persuaded Stern to move his program to its service. Performance compensation under the resulting licensing agreement called for Sirius to pay Stern’s production company up to five separate awards of common stock in Sirius—each worth $75 million—if a series of ever-rising subscriber thresholds was met.

To implement this deal, the parties included in their formal written contract an exhibit setting out the company’s estimated number of subscribers as of year-end for each of the ensuing five years. The agreement then provided that the company would pay a stock bonus if at any year-end the actual number of subscribers exceeded the target by a specified amount: a first bonus for exceeding the target by two million; a second for exceeding it by four million; a third for exceeding by six million; a fourth for exceeding by eight million; and a fifth by ten million.

There was no dispute about what happened the first two years: at 2006, actual subscribers exceeded estimated subscribers by more than two million and Sirius promptly delivered $75 million worth of its stock to Stern; at 2007, actual subscribers did not exceed the target by more than four million, and therefore no bonus was due. A complication arose in 2008, however, because in that year Sirius acquired a rival, XM Radio, which had nearly ten million subscribers. So the parties disputed whether those subscribers counted as Sirius subscribers under the bonus provisions of the licensing agreement.

Resolution depended on determining the intended meaning of their contract in light of the specific terms of Sirius’s acquisition of XM. Before the acquisition, Sirius and XM were separate rivals of about equal size (Sirius had more than nine million subscribers)—and both had been wooing Stern to join them. After the acquisition, Sirius changed its name to Sirius XM, but the two continued to operate separately with their own subscribers, although subscribers could buy a premium package to add the other company’s offerings. About one million XM subscribers signed up for the Sirius package.

Counting only original Sirius subscribers, at year-end 2008, actual subscribers did not exceed target subscribers by more than four million contemplated for a second bonus award. Even adding the one million XM subscribers who bought access to Sirius, the target was not so surpassed. But if also counting the nearly ten million XM subscribers that Sirius acquired in the acquisition, then the target was exceeded by more than ten million, triggering all the bonuses and meaning Sirius owed Stern another $300 million worth of stock.

The agreement did not define the term “Sirius subscriber,” though used it often; it defined “Sirius” as “Sirius Satellite Radio Inc.” Both sides thought the agreement was clear and unambiguous. Stern said it clearly included all subscribers to operations managed by Sirius as a corporate entity, including all those of its subsidiaries, whether through organic growth or acquisition; Sirius countered that Sirius subscribers meant people signing up for the Sirius radio service, not others such as those who subscribed to the XM service.

In addition, Sirius pointed to another term of the licensing agreement, which anticipated Sirius acquiring its rival. It called for Sirius to pay Stern $25 million if it acquired XM and to broadcast all of Stern’s shows to “all subscribers of the surviving company.” Sirius, which paid that $25 million, argued that the words “all subscribers of the surviving company” were telling: rather than say “Sirius subscribers,” as done elsewhere throughout the agreement, this phrase was used to denote the broader population containing both Sirius subscribers and XM subscribers.

Stern thought this a bit too technical, explaining that Sirius and XM competed aggressively in recruiting him and the bonus devices and fixed merger fee were intended to reflect his considerable value to whichever firm succeeded in wooing him. Both knew he would enhance the winner’s business substantially. The phrase “all subscribers of the surviving company” in the merger fee provision was used more because Sirius XM did not exist than to distinguish various subscriber bases. Nothing in logic or law makes the two fees mutually exclusive but were intended as cumulative—$25 million upon the merger expanding the subscriber base and bonuses from measurable growth in that base that resulted.

The court saw it as a relatively easy case, granting Sirius’s motion for summary judgment (no need for a trial to resolve disputed facts). The court stated the law concisely:

Unless a material term of the Agreement is ambiguous, the Court need not resort to use of extrinsic evidence to interpret the contract. A contract must be enforced as the parties made, understood and intended it at the time of its execution, with consideration given to the entire contract and the relationship of the parties and circumstances under which it was executed.

As applied, the court explained:

While it may be true that Stern … hoped and expected to reap the benefits from any significant growth that Sirius experienced after they entered into the Agreement, that subjective expectation cannot suffice to override the clear, unambiguous language of the Agreement.

The licensing agreement opted for the expression “Sirius subscriber” and used it throughout in a manner denoting those who subscribe to the Sirius radio system; the subscribers added as a result of the XM acquisition were subscribers to the XM system—only one million of the nearly-ten million subsequently also signed up to the Sirius system.

Stern may have been correct that Sirius’s ownership of XM entitles it, as a corporate parent, to the fruits of those subscriptions, making them “Sirius subscribers” in some sense. But that does not make them subscribers to the Sirius service, which is what the contract’s use of the phrase Sirius subscribers clearly intended to capture, the court said.

And the parties did distinguish subscribers accruing organically from those added by acquisition in the separate merger fee provision and expressed their intention by using the phrase “subscribers of the surviving company.” To hold for Stern would be to ignore the words chosen to express the parties’ agreement.

One solution would be to define “Sirius subscriber” expressly to mean “customers who pay a fee in exchange for receiving access to the services of the Sirius satellite radio service.” Another approach would clarify that the bonus provisions concern subscriber counts that grow organically through the incumbent operations of the business and not count subscribers added by acquisition of other radio services or businesses. Either way, cases and circumstances like this help to explain the length and intricacy of many contracts.

Stern appealed but lost on appeal too. Litigation risk from contractual imprecision leads deal lawyers to careful expression. In hindsight, we may agree with the court about the plain meaning of the phrase Sirius subscriber, particularly when conjoined to the merger fee provision. But you can be sure that when negotiating a similar deal, the next lawyer will strive to add clarity.

Lawrence Cunningham is a professor at George Washington University whose forthcoming books include the second edition of Contracts in the Real World: Stories of Popular Contracts and Why They Matter, which includes this story and fifty more.

Case: One Twelve, Inc. v. Sirius XM Radio Inc., 2012 WL 10007771 (N.Y. Sup. Ct. 2012), affirmed, 961 N.Y.S.2d 916 (App. Div. 1st Dept. 2013).

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